SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2001.
Commission File Number 0-10658
BWC FINANCIAL CORP.
Incorporated pursuant to the Laws of California
Internal Revenue Service - Employer Identification No. 94-2621001
1400 Civic Drive, Walnut Creek, California 94596
(925) 932-5353
N/A
(Former name, former address, and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No _____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as the latest practicable date. As of June 30, 2001, there were 3,116,128 shares of common stock, no par value outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PART II - OTHER INFORMATION
Item 1 | Legal Proceedings | 18 |
Item 2 | Changes in Securities | 18 |
Item 3 | Defaults Upon Senior Securities | 18 |
Item 4 | Submission of Matters to a Vote of | |
Security Holders | 18 | |
Item 5 | Other Materially Important Events | 18 |
Item 6 | Exhibits and Reports on Form 8-K | 18 |
Signatures | 19 |
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
In thousands June 30, December 31, Assets 2001 2000 ------------------------ (Unaudited) Cash and Due From Banks ...................................... $ 18,422 $ 20,684 Federal Funds Sold ........................................... 8,380 3,268 Other Short-term Investments ................................. 54 520 ------------------------ Total Cash and Cash Equivalents .......... 26,856 24,472 Investment Securities: Available-for-Sale ...................................... 56,884 58,025 Held-to-Maturity (approximate fair value of $10,528 in 2001 and $9,975 in 2000) .................. 10,303 9,920 Loans, Net of Allowance for Credit Losses of $5,097 in 2001 and $5,042 in 2000 .............................. 265,056 247,281 Bank Premises and Equipment, Net ............................. 3,188 2,892 Interest Receivable and Other Assets ......................... 8,379 7,923 ------------------------ Total Assets ............................. $370,666 $350,513 ======================== Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing ..................................... $ 88,173 $ 88,143 ------------------------ Interest-bearing: Money Market Accounts .............................. 132,790 114,718 Savings and NOW Accounts ........................... 39,759 38,892 Time Deposits: Under $100 .................................... 30,294 31,554 $100 or more .................................. 33,861 36,329 ------------------------ Total Interest-bearing ........................ 236,704 221,493 Total Deposits ........................... 324,877 309,636 Federal Funds Purchased ...................................... -- -- Federal Home Loan Bank Borrowings ............................ 6,578 2,424 Interest Payable and Other Liabilities ....................... 3,049 4,242 ------------------------ Total Liabilities ........................ 334,504 316,302 ------------------------ Commitments and Contingent Liabilities Shareholders' Equity Preferred Stock, no par value: 5,000,000 shares authorized, none outstanding ......... -- -- Common Stock, no par value: 25,000,000 shares authorized; issued and outstanding - 3,116,128 shares in 2001 and 2,850,850 in 2000 ...... 28,237 23,193 Retained Earnings ............................................ 7,524 10,975 Accumulated other comprehensive income ....................... 401 43 ------------------------ Total Shareholders' Equity ............... 36,162 34,211 ------------------------ Total Liabilities and Shareholders' Equity $370,666 $350,513 ======================== The accompanying notes are an integral part of these consolidated statements
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
In thousands except per-share amounts For the Three Months For the Six Months Interest Income Ended June 30, Ended June 30, ---------------------------------------------------- 2001 2000 2001 2000 Loans, including Fees (Unaudited) (Unaudited) (Unaudited) (Unaudited) ---------------------------------------------------- Investment Securities: ......................... $ 6,802 $ 6,818 $ 13,916 $ 12,946 Taxable ................................... 819 791 1,601 1,586 Non-taxable ............................... 114 124 224 251 Federal Funds Sold ............................. 73 93 276 182 Other Short-term Investments ................... 2 10 19 25 ---------------------------------------------------- Total Interest Income ............... 7,810 7,836 16,036 14,990 Interest Expense Deposits ..................................... 2,199 2,106 4,720 4,054 Federal Funds Purchased ...................... 16 6 16 -- FHLB Borrowings .............................. 91 -- 146 21 Other Borrowed Funds ......................... 1 1 1 41 ---------------------------------------------------- Total Interest Expense ............. 2,307 2,113 4,883 4,116 Net Interest Income ................................. 5,503 5,723 11,153 10,874 Provision for Credit Losses ......................... 375 250 750 475 ---------------------------------------------------- Net Interest Income After Provision For Credit Losses 5,128 5,473 10,403 10,399 Noninterest Income BWC Mortgage Services - Commissions .......... 1,428 744 2,628 1,259 BWC Mortgage Services - Fees & Other ......... 212 161 395 305 Service Charges on Deposit Accounts .......... 193 197 396 394 Other ........................................ 322 270 654 526 Gains on Security Transactions ............... 11 -- 65 -- ---------------------------------------------------- Total Noninterest Income ............ 2,166 1,372 4,138 2,484 Noninterest Expense Salaries and Related Benefits ................ 2,405 2,041 4,730 4,066 BWC Mortgage Services - Commissions .......... 979 488 1,791 857 BWC Mortgage Services - Fees & Other ......... 158 152 318 309 Occupancy .................................... 321 269 613 512 Furniture and Equipment ...................... 207 169 396 338 Other ........................................ 1,290 909 2,238 1,915 ---------------------------------------------------- Total Noninterest Expense ........... 5,360 4,028 10,086 7,997 ---------------------------------------------------- BWC Mortgage Services - Minority Interest ........... 166 84 302 94 Income Before Income Taxes .......................... 1,768 2,733 4,153 4,792 Provision for Income Taxes .......................... 654 1,012 1,556 1,741 ---------------------------------------------------- Net Income .......................................... $ 1,114 $ 1,721 $ 2,597 $ 3,051 ==================================================== Basic Earnings Per Share ............................ $ 0.36 $ 0.55 $ 0.83 $ 0.96 Diluted Earnings Per Share .......................... $ 0.32 $ 0.49 $ 0.75 $ 0.86 ==================================================== Weighted Average Basic Shares ....................... 3,109,514 3,156,936 3,130,500 3,190,279 Weighted Average Diluted Share Equivalents Related to Options ................... 327,128 357,693 330,897 357,854 Weighted Average Diluted Shares ..................... 3,436,642 3,514,629 3,461,397 3,548,133 ==================================================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands For the Six Months Ended June 30, --------------------------------- 2001 2000 ---------------------------- OPERATING ACTIVITIES: (Unaudited) (Unaudited) Net Income ......................................................... $ 2,597 $ 3,051 Adjustments to reconcile net income to net cash provided(used): Amortization of loan fees ..................................... (938) (1,007) Provision for credit losses ................................... 750 475 Depreciation and amortization ................................. 284 226 Gain on sale of securities available for sale ................. (65) -- Tax benefit from the exercise of stock options ................ 299 250 Increase in accrued interest receivable and other assets ........................................... (456) (789) Increase/(decrease) in accrued interest payable and other liabilities ...................................... (1,193) 580 -------------------------- Net Cash Provided by Operating Activities ........... 1,278 2,786 -------------------------- INVESTING ACTIVITIES: Proceeds from maturities of investment securities .................. 7,726 4,767 Proceeds from the sales of available-for-sale investment securities 23,881 2,000 Purchase of investment securities .................................. (30,426) (3,533) Loans originated, net of collections ............................... (17,587) (16,134) Purchase of bank premises and equipment ............................ (580) (324) -------------------------- Net Cash Used by Investing Activities ............... (16,986) (13,224) -------------------------- FINANCING ACTIVITIES: Net increase in deposits ........................................... 15,241 30,078 Increase(decrease) in Fed Funds Purchased and other borrowings ..... 4,154 (5,350) Proceeds from issuance of common stock ............................. 227 699 Cash paid for the repurchase of common stock ....................... (1,525) (2,312) Cash paid in lieu of fractional shares ............................. (5) -- Decrease in BWC Mortgage Services borrowings ....................... -- (425) -------------------------- Net Cash Provided by Financing Activities ........... 18,092 22,690 -------------------------- CASH AND CASH EQUIVALENTS: Increase in cash and cash equivalents .............................. 2,384 12,252 Cash and cash equivalents at beginning of year ..................... 24,472 12,618 -------------------------- Cash and Cash Equivalents at period end ....................... $ 26,856 $ 24,870 ========================== ADDITIONAL CASH FLOW INFORMATION: Interest Paid ...................................................... $ 4,777 $ 3,746 ========================== Income Taxes Paid .................................................. $ 2,285 $ 670 ========================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the periods ending December 31, 2000, and 2001 Accumulated In thousands except share amounts Other Number Common Retained Comprehensive Comprehensive of Shares Stock Earnings Income/(Loss) Total Income ------------------------------------------------------------------------------- Balance, January 1, 2000 ..................... 2,612,786 $ 20,154 $ 9,802 $ (527) $ 29,429 Net Income as of December 31, 2000 ........... -- -- 6,435 -- 6,435 $ 6,435 Other Comprehensive Income, net of tax liability of $350,000 ................... -- -- -- 570 570 570 ---------- Comprehensive Income ......................... -- -- -- -- -- $ 7,005 Stock options exercised ...................... 122,460 495 -- -- 495 Repurchase and retirement of shares by the Corporation ............................... (159,774) (3,387) -- -- (3,387) Common Stock Issued and sold to the Defined Contribution Plan ............... 15,640 321 -- -- 321 10% stock dividend including payment of fractional shares ....................... 259,738 5,260 (5,262) -- (2) Tax benefit from the exercise of stock options -- 350 -- -- 350 ------------------------------------------------------------------- Balance, December 31, 2000 ................... 2,850,850 $ 23,193 $ 10,975 $ 43 $ 34,211 (Unaudited) Net Income as of June 30, 2001 ............... -- -- 2,597 -- 2,597 $ 2,597 Other Comprehensive Income, net of tax liability of $250,000 ................... -- -- -- 358 358 358 ---------- Comprehensive Income ......................... -- -- -- -- -- $ 2,955 Stock options exercised ...................... 48,044 227 -- -- 227 Repurchase and retirement of shares by the Corporation ............................... (64,474) (1,525) -- -- (1,525) 10% stock dividend including payment of fractional shares ....................... 281,708 6,043 (6,048) -- (5) Tax benefit from the exercise of stock options -- 299 -- -- 299 ------------------------------------------------------------------- Balance, June 30, 2001 ...................... 3,116,128 $ 28,237 $ 7,524 $ 401 $ 36,162 The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position at June 30, 2001 and the results of operations for the six months ended June 30, 2001 and 2000 and cash flows for the six months ended June 30, 2001 and 2000.
Certain information and footnote disclosures presented in the Corporation’s annual consolidated financial statements are not included in these interim financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s 2000 Annual Report to Shareholders, which is incorporated by reference in the Company’s 2000 annual report on Form 10-K. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the operating results for the full year.
Diluted earnings per share is computed using the weighted average number of shares outstanding during the period, adjusted for the dilutive effect of stock options. All per share amounts have been restated to reflect the 10% stock dividend given May, 2001.
2. INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS
The amortized cost and approximate market value of investment securities at June 30, 2001 are as follows:In thousands Gross Amortized Unrealized Market Cost Gain Value ----------------------------------- Held-to-maturity Obligations of State and Political Subdivisions ............. $10,303 $ 225 $10,528 Available-for-sale U.S. Treasury Securities ............. 1,006 9 1,015 U.S. Government Agencies ............. 27,442 168 27,610 Taxable Obligations of State & Political Subdivisions ..... 23,457 422 23,879 Corporate Securities ................. 4,333 47 4,380 - -------------------------------------------------------------------------------- Total Available-for-sale ............. $56,238 $ 646 $56,884 The following table shows the amortized cost and estimated market value of investment securities by contractual maturity at June 30, 2001. In thousands Held-to-Maturity Available-for-Sale ------------------------------------------------ Amortized Market Amortized Market Cost Value Cost Value ------------------------------------------------ Within one year ............ $ 871 $ 875 $13,147 $13,258 After one, but within five, years ............. 8,575 8,775 39,297 39,790 Over five years ............ 857 878 3,794 3,836 - -------------------------------------------------------------------------------- Total ...................... $10,303 $10,528 $56,238 $56,884
3. ALLOWANCE FOR CREDIT LOSSES
In Thousands For the Six Months Ended June 30, 2001 2000 --------------------------- Total loans outstanding at end of period, before deducting allowance for credit losses ........................ $ 270,153 $ 231,463 --------------------------- Allowance for credit losses at beginning of period ..................... 5,042 4,466 Charge-offs ................................ (825) (106) Recoveries ................................. 130 58 --------------------------- Net (charge-offs)/recoveries ............... (695) (48) Provisions ................................. 750 475 Allowance for credit losses at end of period ........................... $ 5,097 $ 4,893 =========================== Ratio of allowance for credit losses to loans ......................... 1.89% 2.11%
4. COMPREHENSIVE INCOME
For the Bank, comprehensive income includes net income reported on the statement of income and changes in the fair value of its available- for-sale investments reported as a component of shareholders’ equity.
The components of other comprehensive income for the six months ended June 30, 2001 and 2000 are as follows:2001 2000 ================================================================================ Unrealized gain(loss) arising during the period, net of tax ................... $ 398 $(121) -------------------- Reclassification adjustment for net realized gains on securities available-for-sale included in net income during the year, net of tax .............. 40 -- -------------------- Net unrealized gain(loss) included in other comprehensive income ................... $ 358 $(121) ====================
5. BUSINESS SEGMENTS
The Corporation is principally engaged in community banking activities through its eight Bank branches. In addition to its community banking activities, the Corporation provides mortgage brokerage services through its joint venture, BWC Mortgage Services. These activities are monitored and reported by Corporation management as a separate operating segment. The separate banking offices have been aggregated into a single reportable segment, Community Banking. The Corporation's community banking segment provides loans, leases and lines of credit to local businesses and individuals. This segment also derives revenue by investing funds that are not loaned to others in the form of loans, leases or lines of credit, into investment securities. The business purpose of BWC Mortgage Services is the origination and placement of long-term financing for real estate mortgages. Summarized financial information for the years ended June 30, 2001 and 2000 concerning the Corporation's reportable segments is shown in the following table.For the Six Months Community Mortgage Ended 06/30/2001 Banking Services Adjustments Total - -------------------------------------------------------------------------------- Total Interest Income ..... $ 16,039 $ 3 $ (6) 16,036 Commissions Received ...... -- 2,628 -- 2,628 Total Interest Expense .... 4,886 3 (6) 4,883 Salaries & Benefits ....... 4,421 309 -- 4,730 Commissions Paid .......... -- 1,791 -- 1,791 Segment Profit before Tax . 3,922 604 (373) 4,153 Total Assets .............. $370,563 $ 374 $ (271) $370,666 -------- For the Six Months Community Mortgage Ended 06/30/2000 Banking Services Adjustments Total - -------------------------------------------------------------------------------- Total Interest Income ..... $ 14,987 $ 11 $ (8) $ 14,990 Commissions Received ...... -- 1,259 -- 1,259 Total Interest Expense .... 4,106 18 (8) 4,116 Salaries & Benefits ....... 3,864 202 -- 4,066 Commissions Paid .......... -- 857 -- 857 Segment Profit before Tax . 4,747 189 (144) 4,792 Total Assets .............. $322,375 $ 448 $ 357 $323,180 - -------------------------------------------------------------------------------- For the Three Months Community Mortgage Ended 06/30/2001 Banking Services Adjustments Total - -------------------------------------------------------------------------------- Total Interest Income ..... $ 7,811 $ 2 $ (3) $ 7,810 Commissions Received ...... -- 1,428 -- 1,428 Total Interest Expense .... 2,309 1 (3) 2,307 Salaries & Benefits ....... 2,234 171 -- 2,405 Commissions Paid .......... -- 979 -- 979 Segment Profit before Tax . 1,643 332 (207) 1,768 Total Assets .............. $370,563 $ 374 $ (271) 370,666 - -------------------------------------------------------------------------------- For the Three Months Community Mortgage Ended 06/30/2000 Banking Services Adjustments Total - -------------------------------------------------------------------------------- Total Interest Income ..... $ 7,840 $ 2 $ (6) 7,836 Commissions Received ...... -- 744 -- 744 Total Interest Expense .... 2,114 5 (6) 2,113 Salaries & Benefits ....... 1,948 93 -- 2,041 Commissions Paid .......... -- 488 -- 488 Segment Profit before Tax . 2,684 169 (120) 2,733 Total Assets .............. $322,375 $ 448 $ 357 323,180 - --------------------------------------------------------------------------------
6. DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The Statement, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Corporation does not own any freestanding or imbedded derivatives.
The Corporation adopted SFAS 133 effective January 1, 2001. The implementation of this statement did not have a material impact on the Corporation’s financial position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
General
Total assets of the Corporation at June 30, 2001 of $370,666,000 have increased $48,003,000 or 15% as compared to June 30, 2000. Total loans of $270,153,000 have increased $38,690,000 or 17%, and total deposits of $324,877,000 have increased $36,131,000 or 13%. Since year-end 2000 the Corporation’s assets have increased 6%, loans increased 7%, and deposits increased 5%.
The Corporation’s loan-to-deposit ratio as of June 30, 2001 was 83%, as compared to 80% in 2000.
Net Income
Net income for the first six months in 2001 of $2,597,000 was $454,000 less than the first six months in 2000. This represented a return on average assets during this period of 1.45% and a return on average equity of 14.67%. The return on average assets during the first six months of 2000 was 1.94%, and the return on average equity was 20.21%.
Net income for the three months ending June 30, 2001 of $1,114,000 was $607,000 less than the comparable period in 2000. The return on average assets during the second quarter was 1.23%, and the return on average equity was 12.48%. The return on average assets during the second quarter of 2000 was 2.16%, and the return on average equity was 22.65%.
Earning assets averaged $337,682,000 during the six months ended June 30, 2001, as compared to $293,002,000 for the comparable period in 2000. Earning assets averaged $341,441,000 during the second quarter of 2001 as compared to $297,745,000 during the second quarter of 2000.
Diluted earnings per average common share were $.75 for the first six months of 2001 as compared to $0.86 for the first six months of 2000. For the second quarter of 2001, diluted earnings per average common share were $0.32 as compared to $0.49 for the second quarter of 2000.
Net Interest Income
Interest income represents the interest earned by the Corporation on its portfolio of loans, investment securities, and other short-term investments. Interest expense represents interest paid to the Corporation’s depositors, as well as to others from whom the Corporation borrows funds on a temporary basis.
Net interest income is the difference between interest income on earning assets and interest expense on deposits and other borrowed funds. The volume of loans and deposits and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first six months of 2001 was $11,153,000 or $279,000 greater than the comparable period in 2000, however, this was on a net earning-asset base (earning assets less interest-bearing deposits and borrowings) that averaged $9,149,000 more than during the first six months of 2000. The prime lending rate decreased from 9.50% at the beginning of 2001 to 6.75% as of June 30, 2001, or a drop of 2.75%. The average prime rate for the first six months of 2001 was 7.98% as compared to an average of 8.97% in 2000.
Due to the Corporation’s asset-sensitive position, decreasing interest rates result in a decrease in the Corporation’s net interest margin. The Corporation’s net interest margin averaged 6.71% during the first six months of 2001 as compared to 7.53% in 2000. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $1,289,000 during the first six months of 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $1,568,000.
During the second quarter 2001 the Corporation’s net interest margin averaged 6.53% as compared to 7.80% in 2000. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $937,000 during the second quarter of 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $717,000. The result was a net decrease in interest income of $220,000 during the second quarter of 2001 as compared to 2000.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated and is in accordance with SFAS 114. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Management continually evaluates the economic climate, the performance of borrowers, and other conditions to determine the adequacy of the allowance.
The ratio of the allowance for credit losses to total loans as of June 30, 2001 was 1.89%, as compared to 2.11% for the period ending June 30, 2000. The Corporation’s ratios for both periods is considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for loan losses. As of June 30, 2001 it had $4,818,000 in allocated allowance and $279,000 in unallocated allowance. The Corporation’s management believes that the amount of unallocated allowance is reasonable due to the growth of the Bank’s loan portfolio and the new credit products that have been introduced. In the past few years, the Bank has opened an Asset-based Lending Department, a Leasing Department and a Small Business Administration lending program. The Bank also has a high concentration of credit in Construction Real Estate lending. The uncertainties associated with the new products, coupled with the Bank’s traditionally strong construction concentration, fully support a strong allowance position.
The Corporation had net charge-offs of $695,000 during the first six months of 2001 as compared to net charge-offs of $48,000 during the comparable period in 2000. During the second quarter of 2001 a charge was taken against the allowance of approximately $600,000 related to one borrower in the Corporation’s Accounts Receivable Department.
The following table provides information on past-due and nonaccrual loans:
June 30, 2001 2000 --------------------------- Loans Past-due 90 Days or More $ 30,000 $ 21,000 Nonaccrual Loans 1,311,000 24,000 --------------------------- Total $1,341,000 $ 45,000 ===========================
As of June 30, 2001 and 2000, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2001 remains uncollected. Interest foregone on nonaccrual loans was approximately $252,000 and $6,000, as of June 30, 2001 and 2000 respectively.
Noninterest Income
Noninterest income during the first six months of 2001 was $1,654,000 greater than during the comparable period of 2000. The increase in 2001 was primarily related to increased activity in the Corporation’s brokerage subsidiary, BWC Mortgage Services, which had total fee income of $2,628,000 during the first half of 2001 which was $1,369,000 more than that earned during the comparable period in 2000. The increase in income is in part a reflection of the decrease in interest rates during the current year and the corresponding increase in mortgages and refinancing activity.
The other categories of noninterest income are comparable to the prior year and the Corporation’s growth.
There were gains on securities available-for-sale of $65,000 during the first six months of 2001 whereas there were none during the 2000 period. The gains in 2001 were the result of a large number of agency securities which were called by the issuing agencies due to the decline in rates and the ability of these agencies to reissue debt at lower rates.
During the second quarter of 2001 noninterest income from BWC Mortgage Services was $1,428,000 which was $684,000 more than that earned during the comparable quarter of 2000. The same reasons given above for the six-month results are applicable to the second quarter.
Noninterest Expense
Noninterest expense during the first six months of 2001 was $2,089,000 greater than during the comparable period in 2000.
BWC Mortgage Services reflected an increase in noninterest expense of $943,000 during the respective periods, which is related to their increase in mortgage origination activity due in part to lower interest rates.
Salaries and related benefits were $664,000 greater during the first six months of 2001 as compared to 2000. This increase is related to the growth of operations, general merit increases and provision for performance bonuses. As the year progresses, if performance goals are not met, bonus provisions may be reduced or reversed. The Bank’s staff averaged 119 full-time equivalent (FTE) persons during the first six months of 2001 as compared to 112 FTE in 2000.
Occupancy expense increased $101,000 over the comparable period in 2000 in part due to the Bank’s new San Jose office, which was opened in March, 2001, and due to CPI and operating increases.
Total furniture and equipment expenses increased $58,000 as compared to the 2000 period, which is related in part to the addition of the San Jose office and additions and upgrades to the Bank’s information technology systems.
Other expenses reflect an increase of $323,000 between the respective periods. The Bank incurred an operating loss of approximately $100,000 during the second quarter of 2001 related to check fraud. The balance of the increase in other expenses is primarily related to the Corporation’s growth and expanded activities.
During the second quarter of 2001 the Corporation’s noninterest expense increased $1,332,000 over the comparable quarter of 2000. BWC Mortgage Services reflected a increase in noninterest expense of $497,000 during the comparable periods, and other Corporation noninterest expenses reflected an increase of $835,000. The reasons that were applicable for the first six months apply to the second quarter results, particularly as related to the new San Jose office and the operating loss mentioned above.
Other Real Estate Owned
As of June 30, 2001 the Corporation had no Other Real Estate Owned assets (assets acquired as the result of foreclosure on real estate collateral) on its books.
Capital Adequacy
The Federal Deposit Insurance Corporation (FDIC) has established risk-based capital guidelines requiring banks to maintain certain ratios of “qualifying capital” to “risk-weighted assets”. Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the bank’s Tier 1 capital consists of shareholders’ equity, while Tier 2 capital includes the eligible allowance for credit losses. The Bank has no subordinated notes or debentures included in its capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance-sheet assets and off-balance-sheet assets.
The Bank’s Tier 1 and Total (which included Tier 1 and Tier 2) risk-based capital ratios surpassed the regulatory minimum of 8% at June 30, for both 2001 and 2000. The FDIC has also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by the quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3% for the highest-rated banks.
The following table shows the Corporation’s risk-based capital ratios and leverage ratio as of June 30, 2001, December 31, 2000, and June 30, 2000.
Risk-based capital ratios: CAPITAL RATIOS Minimum June 30, December 31, June 30, Regulatory 2001 2000 2000 Requirements ------------------------------------------------ Tier 1 capital ......... 11.48% 12.21% 11.86% 4.00% Total capital .......... 12.73% 13.58% 13.12% 8.00% Leverage ratio ......... 9.86% 10.66% 9.87% 3.00%
Liquidity
Liquidity is a key aspect in the overall fiscal health of a financial corporation. The primary source of liquidity for BWC Financial Corp. is its marketable securities and Federal Funds Sold. Cash, investment securities and other temporary investments represented 25% of total assets at June 30, 2001 and 27% at June 30, 2000. The Corporation’s management has an effective asset and liability management program and carefully monitors its liquidity on a continuing basis. Additionally, the Corporation has available from correspondent banks Federal Fund lines of credit totaling $15,000,000 and the ability to borrow, on a collateralized basis, from the Federal Home Loan Bank.
Interest-Rate Risk Management
Movement in interest rates can create fluctuations in the Corporation’s income and economic value due to an imbalance in the re-pricing or maturity of assets or liabilities. The components of interest-rate risk which are actively measured and managed include: re-pricing risk and the risk of non-parallel shifts in the yield curve. Interest-rate risk exposure is actively managed with the goal of minimizing the impact of interest-rate volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to re-pricing or maturity characteristics. Therefore, the Corporation uses a variety of measurement tools to monitor and control the overall interest-rate risk exposure of the on-balance-sheet positions. For each measurement tool, the level of interest-rate risk created by the assets and liabilities is a function primarily of their contractual interest-rate re-pricing dates and contractual maturity (including principal amortization) dates.
The Corporation’s interest-rate risk as of June 30, 2001 was consistent with the interest-rate exposure presented in the Corporation’s 2000 annual report and was within the Corporation’s risk policy range.
Interest Rate Sensitivity
(In thousands)Proper management of the rate sensitivity and maturities of assets and liabilities is required to provide an optimum and stable net interest margin. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing strategies and means to improve profitability. The schedules shown below reflect the interest rate sensitivity position of the Corporation as of June 30, 2001. In a rising interest rate environment, the Corporation’s net interest margin and net interest income will improve. A falling interest rate environment will have the opposite effect. Management believes that the sensitivity ratios reflected in these schedules fall within acceptable ranges, and represent no undue interest rate risk to the future earnings prospects of the Corporation.
Repricing within: 3 3-6 12 1-5 Over 5 In thousands months months months years years Totals - --------------------------------------------------------------------------------------------------- Assets: Federal Funds Sold & Short-term Investments ................. $ 8,434 $ -- $ -- $ -- $ -- $ 8,434 Investment securities .......... 6,893 3,570 11,101 43,998 1,625 67,187 Construction & Real Estate Loans 58,060 44,408 20,893 1,529 6,157 131,047 Commercial Loans ............... 59,696 17,142 3,886 2,486 0 83,210 Consumer Loans ................. 42,218 121 234 542 0 43,115 Leases ......................... 2,486 1,792 3,231 5,273 -- 12,782 ---------------------------------------------------------------- Interest-bearing assets ........ $177,787 $ 67,033 $ 39,345 $ 53,828 $ 7,782 $345,775 ---------------------------------------------------------------- Liabilities: Money market accounts .......... $ 66,395 $ 66,395 $ -- $ -- $ -- $132,790 Time deposits <$100,000 ........ 10,958 7,469 10,245 1,621 0 30,293 Time deposits >$100,000 ........ 12,400 9,040 10,959 1,462 0 33,861 ---------------------------------------------------------------- Interest-bearing liabilities ... $ 89,753 $ 82,904 $ 21,204 $ 3,083 $ -- $196,944 ---------------------------------------------------------------- Rate-sensitive gap ............. $ 88,034 $(15,871) $ 18,141 $ 50,745 $ 7,782 $148,831 Cumulative rate-sensitive gap .. $ 88,034 $ 72,163 $ 90,304 $141,049 $148,831 ====================================================== Cumulative rate-sensitive ratio 1.98 1.42 1.47 1.72 1.76
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings The Corporation is a defendant in legal actions arising from normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Corporation's financial position. Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Materially Important Events None Item 6 - Exhibits and Reports on Form 8-K None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BWC FINANCIAL CORP. (Registrant) 7/25/2001 James L. Ryan - --------------------------- --------------------------------- Date James L. Ryan Chairman and Chief Executive Officer 7/25/2001 Leland E. Wines - ---------------------- -------------------------------- Date Leland E. Wines CFO and Corp. Secretary